FedNow Launch Is A Starting Point, Not An Endpoint
Goldman Sees 5.8% Net Charge-Offs, Greenwood Looks To Settle Messy Lawsuit, CFPB Is Already Using That "Dormant" Authority, Fintech VC Funding Dips Below 2017 Levels
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FedNow’s Launch Is A Starting Point, Not An Endpoint
In the most significant step forward in the Federal Reserve’s payments capabilities since the 1970s, the central bank launched FedNow, its instant payment service, last Thursday.
The deployment, understandably, has generated a lot of attention and excitement in the banking and fintech community, with many heralding the move as a long-overdue sea change in the American payments landscape.
Analysts point to the roll out of other real-time payments systems, like Pix in Brazil or UPI in India, in prognosticating about the potential for FedNow in the US.
But the US isn’t Brazil or India, and FedNow isn’t Pix or UPI.
I’m less convinced FedNow will drive a payments revolution so much as an evolution.
Why? For starters, while FedNow “went live” last week, it is just beginning to roll out.
The service went live with 41 banks, including some of the country’s largest, as well as 15 service providers, which includes dominant core banking providers like FIS, Fiserv, Jack Henry, and Temenos.
But the US has more than 4,100 banks and over 4,700 credit unions — plus countless other non-bank financial service providers.
The Clearing House, an association owned by the largest commercial banks in the US, launched its own real-time payments system, The Clearing House RTP, in November 2017. But nearly six years later, it has achieved coverage of just 65% of demand deposit accounts.
A key driver of ACH’s utility is that it is ubiquitous — it reaches every US bank and credit union.
But adopting FedNow is not required, meaning the Fed is counting on market forces to encourage banks and credit unions to participate.
While institutions may feel competitive pressure to offer and enable real-time payments, there may also be disincentives to do so, as the capabilities may disrupt existing business models and profit centers. Real-time payments and settlement have the potential to eat into sources of fee revenue, like overdrafts and NSFs, reduce income earned from float, and, potentially, compete with credit/debit cards and thus reduce interchange income.
Many non-bank services, whether P2P apps like Venmo and Cash App or cash advance apps like MoneyLion and Dave, earn revenue from expedited funding fees. Ubiquitous, cheap real-time payments threaten these established business models.
Despite what seems like a watershed moment, consumers aren’t likely to notice any difference in the near-term.
FedNow is a wholesale, bank-to-bank payment system, not a consumer-facing brand. You won’t be “FedNow-ing” a friend to split the bill after your next dinner.
Besides, consumer services like Venmo, Cash App, and Zelle already give the illusion of real-time payments. Earned wage access providers like DailyPay or Clair, though not available to every employee, offer solutions for workers to get immediate access to earned wages.
Same-day ACH, while not universal, may be easier for merchants and financial institutions to adopt. And private-market offerings like Visa’s Visa Direct, though more expensive, may be more attractive, if they offer broader reach or are easier to implement than FedNow.
This is all to say, the launch of FedNow is but a starting point — its impact on the wider payments and financial services landscape remains to be seen and will depend on decisions market participants make in the coming months and years.
The CPFB Is Already Using That “Dormant” Authority
Dodd-Frank granted the CFPB explicit authority to supervise banks with more than $10 billion in assets and all entities, regardless of size, in the mortgage, private student lending, and payday lending industries.
The Bureau also has authority over certain nonbank “larger participants” in financial markets, which includes entities like the major credit bureaus, debt collectors, auto loan servicers, student loan servicers, and remittance companies, for instance.
The CFPB also has statutory authority to supervise “nonbanks whose activities the CFPB has reasonable cause to determine pose risks to consumers,” an authority the Bureau hasn’t used — until now.
According to reporting from Bloomberg, at least three companies have voluntarily agreed to be supervised by the Bureau: one buy now, pay later company, one earned wage access company, and one “big tech” company.
Of the news, Director Chopra told Bloomberg:
“Many entities are thinking to themselves that they would prefer to go through that process rather than answering to an enforcement investigation.
There is less of a ‘move fast and break things’ orientation. They want to be able to demonstrate to their bank partners, to their investors, and others that they’re running a mature operation.”
Neobank Greenwood Close To Settling Messy Lawsuit, Report Indicates
Greenwood, a neobank focused on serving Black and Latino Americans, which recently acquired competitor Kinly (formerly First Boulevard), is working to put a messy lawsuit behind it, a report indicates.
The dispute stems from Greenwood’s 2022 acquisition of Black-focused members club and coworking space The Gathering Spot.
In a suit initially filed this February, The Gather Spot’s former owners claim that Greenwood engaged “in intentional misconduct to knowingly breach the Parties’ purchase agreement.” Specifically, the former owners allege Greenwood failed to make payments owed pursuant to the purchase agreement.
In its response and counterclaim, Greenwood argues that The Gather Spot’s sellers failed to perform their duties under the purchase agreement; specifically, that certain financial statements necessary to calculate the payout were provided on a cash rather than GAAP basis, and that Greenwood wasn’t given access to all business accounts it is entitled to. Greenwood is seeking attorney’s fees and costs and expenses tied to the litigation.
In additional recent filings, The Gather Spot sellers allege that Greenwood execs paid themselves bonuses instead of a $5 million payment the company owed to them — and that the neobank is insolvent.
Late last week, a source close to the dispute told the Atlanta Business Chronicle the parties are close to reaching a settlement to put the matter behind them.
What Goldman’s Quarterly Earnings Reveal About Its Consumer & Platform Solutions Businesses In Four Bullet Points
Goldman has completed the sale of “substantially all” of its Marcus personal loan portfolio
As it looks for a buyer for its GreenSky unit, the firm recorded a $504 million goodwill impairment charge
Net charge-offs on its remaining consumer credit book reached an annualized 5.8%
Transaction banking revenue declined by 10% year over year to $82 million
Goldman Sachs reported disappointing second quarter earnings last week. While total revenue for the quarter came in at $10.9 billion and earnings totaled $1.22 billion, annualized return on equity (ROE) for the quarter was an anemic 4.0%, driving the firm’s YTD ROE down to 7.8%.
As Goldman continues unwinding its consumer efforts, the impact is showing in its P&L. The firm completed the sale of “substantially all” of its Marcus unsecured personal loan portfolio, recording a gain on sale of $154 million.
Revenue from its “consumer platforms” business, which encompasses Apple Card, GM, and GreenSky, rose 129% YoY and 18% sequentially, driven by higher average credit card balances and higher point-of-sale (GreenSky) loan amounts.
But provisions for credit losses also increased significantly, both because of higher net charge-offs in its card portfolio and growth of the GreenSky portfolio.
Goldman reported a total of 14.3 million “active” consumer platforms customers. Doing some rough back-of-envelope math suggests Goldman has approximately 11 million Apple Card users.
At the time it acquired the GM portfolio, it consisted of approximately 3 million cardholders; with a total of $5 billion in outstanding installment loan balances and assuming an average GreenSky loan of $15-20,000 would suggest 250,000-350,000 current GreenSky borrowers.
Goldman has been seeking to expand the footprint of its transaction banking business aggressively, launching the offering in the UK, the EU, and Japan in recent quarters. But Q2’23 revenue was actually down by 10% year over year to $82 million, though that was an 18% increase in revenue vs. the first quarter.
Finally, Goldman reported its net charge-off in its consumer business was a stunning 5.8% on an annualized basis.
Given Apple Card makes up the bulk of its consumer loan book and its GreenSky portfolio skews prime/super-prime, it’s reasonable to conclude this charge-off rate is being driven by Apple Card borrowers. Given the relatively young tenure of these cardholders, it seems likely the charge-off rate may actually increase in future quarters.
By way of comparison, Capital One reported a 4.38% net charge-off rate in Q2’23.
American Express, with which Goldman is rumored to be in negotiations to take over the Apple partnership, had a net charge-off rate of just 1.7% in Q1’23.
CB Insights State of Fintech: VC Funding Dips Below 2017 Levels
CB Insights released its State of Fintech Q2’23 report last week.
While it’s hardly good news — funding dropped 48% QoQ (though off a Q1 inflated by Stripe’s $6.5 billion round) — it’s a sign of the market working its way through the hangover of 2021 and 2022’s excesses.
Aggregate funding in “mega rounds” of more than $100 million is way down, hitting a 6-year low. The silver lining, if there is one, is that earlier-stage deals are still getting done.
To mix metaphors, perhaps the contraction in VC funding is like a much-needed forest fire, necessary to clear out deadwood and make room for new growth.
Other Good Reads
The Fog of (Deposit) War (Fintech Takes)
Ripple Effect: XRP Notches a “W” for Itself and Crypto (Fintech Ledger)
Apple’s “Goodwill Credit” for Apple Savings Customers Could Cost It $200 Million (Ron Shevlin/Forbes)
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